ASIC bans all short-selling

By Eric Johnston

22 September 2008 — 12:00am

THE Australian Securities and Investments Commission has dramatically widened its crackdown on short-selling, banning the practice across the entire sharemarket for at least a month as a "circuit breaker" to restore confidence.

But the stance has stunned local investors, who warned that market turmoil was likely to follow, given the ban could effectively shut down options and derivatives trading.

The Australian position goes further than US and British regulators, which last week detailed measures to ban short-selling on financial stocks only as part of efforts to prevent wild swings on global bank shares.

Australian and other European regulators followed with their own bans on short-selling on financial stocks, helping to spur the international rally in shares, including a 3.3% surge on Wall Street on Friday.

But last night ASIC widened its ban to include all shares, fearing that restrictions on short-selling on other exchanges would intensify risks on the Australian market.

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Short-selling  the practice by hedge funds and other speculators selling shares they don't own in the hope of buying them back later at a lower price to create a profit  has been blamed for creating excessively volatile market conditions and undermining the price of bank and other financial equities.

ASIC chairman Tony D'Aloisio said the speed at which global capital travelled and the relatively small size and the structure of the Australian market meant that it was necessary to extend the prohibition to all shares.

"To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short-sell plays," Mr D'Aloisio said.

It is believed ASIC had also been concerned about the blurred nature of local financial shares such as Babcock & Brown, which would not have been covered by a direct ban on financial stocks.

Mr D'Aloisio said a circuit breaker was needed to boost confidence.

ASIC said it would reassess in 30 days whether to permit short-selling for non-financial shares. But the ban on financial shares would remain until limits imposed by other international regulators were removed.

Tom Elliott, a hedge fund manager with MM&E Capital, warned: "A lot of firms have positions they need to hedge. If they can't hedge them they will have to dump them into the market."

Treasurer Wayne Swan last night backed the ban, describing the measures by ASIC as an appropriate response to global financial market turbulence. "They will help protect investors as well as the integrity of our financial markets," he said.

Securities and Derivatives Industry Association head of policy Doug Clarke said the market was likely to treat the ban with caution.

"It's an extraordinary move," he said. "The speed in which it came through  especially on the back of Friday night's exemptions  is a surprise."